Jeb Hensarling (R-TX) of the House Financial Services Committee held a hearing on July 10th to discuss legislation to reform the Federal Reserve. Or “Defanging The Fed.”
SIFMA had a nice summary of the hearing.
Rules-Based Policy: Taylor argued that the Federal Reserve’s failure to follow a rule-based policy in years past contributed to the financial crisis.
Federal Reserve Independence: Johnson stated that subjecting the Federal Reserve to GAO audits would have a “chilling effect” on the Fed’s independence and expose its processes to partisan influence.
Accountability and Congressional Hearings: Rep. Garrett and Rep. Stivers insisted that it would not be overly burdensome for Chair Yellen to appear before Congress at least quarterly.
Stress Tests: Calabria criticized the over-reliance on stress tests, and advocated for wider use of leverage rations instead.
Cost-Benefit Analysis: Johnson argued that cost-benefit analysis would only slow down the regulatory process and create “procedural stumbling blocks.”
International Negotiations: Rep. Neugebauer expressed concern that decisions by the Financial Stability Aboard impact U.S. policy without Congressional oversight.
Quantitative Easing and Interest Rates: Johnson said that with higher interest rates, unemployment rates would have remained higher and the recession would have been prolonged.
Of course, nothing will happen. Even if the House passes some form of legislation to reform The Fed, the Senate under Harry Reid (D-NV) will never pass any reform bill. Like Federal housing policy, The Fed is a protectorate and tool of Congress and the Administration.
What has NOT mentioned during the hearing was what I call the Low Velocity “Recovery.” So, here are some charts of what The Fed’s massive intervention in the financial system has NOT helped (mostly because of structural problems in the economy that low rate policies can’t fix).
M1 Money Multiplier is below 1. This means that very dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.
Excess reserves of depository institutions keep on rising.
M2 Money Velocity keeps declining and is the lowest in recorded history.
For an interesting take on money matters, Arthur Cutten has an interesting piece at Jesse’s Cafe Americain called “Green Slime: The Return of Franken-money.”
Despite the low rates induced by The Fed, bank credit growth is no where near it’s levels during the housing and credit bubble.
Mortgages outstanding have finally started growing again (barely).
Homeownership continues to fall despite The Fed’s low rate policies.
Real median household income hasn’t been helped by the massive expansion in The Fed’s Balance Sheet. It is now lower than in 2007, before The Fed’s massive intervention.
Average hourly wage earning growth YoY is almost 50% lower than before The Fed’s dramatic intervention.
The list goes on and on. Basically, The Fed’s actions have helped asset prices zoom (like the S&P500 and house prices), but has done virtually nothing for Main Street USA.
Unless the structural problems facing the USA are fixed (e.g., over-regulation), the economic recovery will likely remain a low velocity recovery for Main Street USA. Particularly with the Environmental Protection Agency on a roll.
It is a bizarro world where Fed policy is seemingly only helping wealthier Americans while Main Street continues to suffer.